Option Investor

Daily Newsletter, Wednesday, 08/20/2008

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Table of Contents

  1. Market Wrap
  2. The Contrarian
  3. New Option Plays
  4. In Play Updates and Reviews

Market Wrap

Double Date

Market Wrap

In my younger days, I used to enjoy the occasional double date, which usually came about when my girlfriend would sweet-talk me into some type of double-date evening with one of her girlfriends, and her new boyfriend.

One reason I enjoyed going on double dates was the friendly bet, or handicapping, of just how long the new couple would actually last together.

My most accurate guess was that Denise and Bob's fondness for each other would last less than one month, while my worst prediction was that Jeff and Leslie's "fling" would last no longer than six months. With two kids, two cats, and a manageable mortgage, Jeff and Leslie are still going strong some 10-years later. She even converted him from a staunch Republican to a Democrat!

You just never know do you? Some relationships last a very short period of time, and others last much longer than you'd expect.

If you've been on a double date, then you may know the routing. Be nice, be friendly, don't talk politics, or religion, and NEVER, never bring up the topic of the ex (girlfriend /boyfriend)!

Market participants were handicapping some double-date action today, but light volumes at both the big board and the NASDAQ suggest there was more listening than talking going on.

A bullish response to Hewlett/Packard's (NYSE:HPQ) $46.16 +5.65% recently completed quarterly earnings report had the major averages posting modest gains at the open, but those gains faded by the 10:00 AM EDT tick as traders turned their attention to Fay and Freddie and this week's EIA inventory report at 10:35 AM EDT.

Yes, Fay, or "Fickle Fay", the wandering hurricane, now tropical storm, that never really had much sense of direction in her life. She'd always been one of those long-winded girls, usually distraught, and drenched anyone within 39 nautical miles with her tears.

Earlier this morning, Fay looked as if she were going to hit every pub, bar, or jack up rig and refinery along southern Gulf shore, and that gave an early bid to oil.

At last check, Fay was holding her heels in hand and walking the beaches of east central Florida, mumbling "I'll call you from Little Rock."

Tropical Storm Fay - 08/20/08 @ 05:00 PM EDT

Now, I did go on a double date that took place over breakfast once, and while Fay was stumbling out the door (let's say she had too much to drink that night), the poor fellow sitting across from me didn't know what to think. "Freddie" was his name.

Financials (I added the Financial Select SPRDs (XLF) to the above internals) opened flat, but then darted to their lows of the session just before the 10:05 AM tick at $19.61, on reports that the mortgage giant Freddie Mac (NYSE:FRE) $3.25 -22.06% is being forced to offer unusually rich terms to investors in a $3 billion auction of its debt. The reports raised new concerns about its health, as well as the hopes for still low on historical standards mortgage rates, as a rise in the companies' borrowing costs could translate into higher mortgage rates for consumer.

It's probably best that Freddie and Fannie hadn't gotten, as Fannie Mae (NYSE:FNM) $4.40 -26.78% also traded week on similar concerns.

Discounting some chatter that the Treasury (U.S. tax payers) may be set to take over Fannie Mae (FNM), Fannie's Chief Executive Daniel Mudd said the concerns about the company's financial position are overblown.

"They haven't offered anything and we haven't asked for anything," Mudd said, referring to the federal government in a public radio interview Wednesday morning.

Fannie and Freddie account for the bulk of the volume on the NYSE today, with each holding today's #1 and #2 spots among most actively traded stocks.


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Lehman Brothers (NYSE:LEH) $13.73 +5.04% also traded weak at the open after the New York Post reported a deal struck earlier this month to raise $5 billion from South Korean wealth funds and institutions had fallen apart. Several analysts warned the investment bank could report major write-downs in the third quarter.

Buckingham Research Group analyst James Mitchell said it is still a "tough environment" for Lehman, which could result in charges and write-downs totaling about $3 billion during its fiscal third quarter.

Mind you, its not even 10:30 AM yet, the server has yet to bring us our coffee.

Fay has stumbled out the door, headed who knows where, and Freddie is looking at us like he just lost his best friend.

It's that "uncomfortable quiet" when you just don't want to say anything.

"Honey, can you let me see the menu again?"

Then the local diner patron walks through the door and everyone in the joint shouts "Goldman!"

Goldman Sachs reiterates its $149 a barrel oil price forecast, saying the black gold's strong fundamentals were a more important factor than a strengthening U.S. Dollar.

US Oil Fund (USO) - Daily Interval

Goldman's reminder of where the firm sees oil heading did have the USO reaching its then to be session high of $94.46 just minutes before the 10:35 AM EIA inventory report. The Nymex September Crude Oil futures (cl08u) terminated today, while the current-month October futures (cl08v) traded its floor-session high of $116.99 at approximately 10:34 AM EDT.

The tankers apparently reached ports here in the U.S. as the EIA said crude oil inventories rose by 9.39 million barrels. Buyers of crude darted from the complex.

But just as the USO slid to important support above the $90.00 level, buyers stood their ground when the reality of a 6.2 million barrel draw in total gasoline stockpiles sunk in.

As refiners have been focusing on distillates the last 4-week's, total gasoline inventories have fallen by 20.46 million barrels.

The EIA said total distillate inventories rose by 481,000 barrels. Patterns here look as if refiners are starting to ease off distillate production, and once again ready to start cranking out some unleaded.

Heating oil stockpiles (>500 PPM Sulfer) rose by 653,000 barrels, up 3.94 million barrels the last 4-weeks, but remain 9.59% below year-ago levels.

On the refining side of the equation, the EIA said gross inputs into refineries fell by 35,000 barrels/day, while crude oil inputs fell by 12,000 barrels/day. Utilzation of operable capacity was down fractionally at 85.70% while the build in crude oil inventories versus crude oil inputs had the number of days of supply for crude oil (excluding the SPR) jumping to 20.5 days from last week's 19.7 days supply.


Membership warehouse retailer's 2Q profit rises to $36.5 million, or 61c a share, as sales climb 18%. Excluding items, earnings are 58c a share, topping estimates by a penny. Company raises fiscal year earnings estimate. Shares fall 8%.


Goldman Sachs widens its loss estimates or cuts profit views for many of its Wall Street broker rivals because it expects more write-downs and losses on mortgages, and warns that the 'tides are not changing.' It's particularly gloomy on the outlook for Lehman.


Application volume falls 1.5% on week for the week ended Aug. 15 and tumbles 34% versus the same week in 2007, as lower mortgage rates fail to inspire more borrowers to apply for a mortgage. The four-week moving average for all mortgages is down 4%.


Oil futures trade higher in anticipation of a draw in gasoline stocks, but market activity is largely muted as traders await U.S. weekly inventory data. Analysts expect the data to show crude stocks rose by 800,000 bbls last week, while gasoline stocks declined 2.4 million bbls and distillates rose 500,000 bbls.


Fannie Mae's and Freddie Mac's ability to repay $223 billion of bonds due by the end of the quarter may determine whether they can avoid a federal bailout, Bloomberg reports.


Computer maker reports 3Q net income of $2.03 billion, or 80c a share. Excluding items, earnings are 86c, 3c better than expected. Revenue jumps 10% to $28.03 billion. Firm offers 4Q guidance that tops Wall Street expectations. Shares gain 2% after-hours.


Russian troops are fortifying a 'buffer zone' around the disputed South Ossetia region with eight military posts and a no-fly rule for Georgian aviation, a senior Russian commander says, adding that 64 Russian military personnel were killed in the conflict.


Dept. of Energy says U.S. Energy Secretary Samuel Bodman entered the hospital last night with an elevated heart rate. Bodman checked himself into the hospital where he expects to remain for a few days to undergo routine tests.


Investment manager's fiscal 3Q earnings drop to $49.6 million, or 40c a share, while revenue slips 1% as net inflow gains are more than offset by market value declines. Analysts were looking for 46c a share. Assets under management as of July 31 fall 2%. Shares down 3%.


Biting attacks by Republican Sen. John McCain on Sen. Barack Obama have narrowed the White House race to a near statistical tie, as the foes gird for the decisive stage of their battle, new polls show.


Tropical Storm Fay reaches the east coast of central Florida and is expected to gradually turn north toward the Atlantic Ocean, the National Hurricane Center says.


The FDIC will unveil a new plan Wednesday to modify mortgage loans for thousands of cash-strapped borrowers of failed California bank IndyMac, which was taken over by federal regulators last month.


President Bush says the Gulf Coast's comeback remains a work in progress, but with a number of positive signs. Bush says the region is on track to reach '100-year flood protection' by 2011.


Online auctioneer says it will lower the fees it charges for products listed for sale at a fixed price, in a bid to become more competitive with rival Web sites such as Amazon.com.


At a time when most other cities are encouraging biking as green transport, Rob Anderson has stymied cycling-support efforts in San Francisco by arguing urban bicycle boosting could actually be bad for the environment. That's put the brakes on everything from new bike lanes to bike racks while the city works on an environmental-impact report.


Global demand for wind energy will continue to soar despite short-term issues such as delays renewing a financial support mechanism in the U.S., and economic slowdowns in Europe and the U.S., the chief executive of the world's largest wind-turbine maker says.

U.S. Market Watch - 08/20/08 Close

While September unleaded (rb08u) and September heating oil (ho08v) terminate on 08/29/08, I'm "rolling" all energy futures contracts in the above Market Watch to the October expiration.

September natural gas futures (ng08u) terminate next Wednesday (08/27/08)

I want to quickly update some internals from YESTERDAY (Tuesday) as I did not a "build" in new 52-week lows at the NYSE, where the number of new lows rose to 176 (includes every security listed on the NYSE).

I quickly ran through some of Dorsey/Wright & Associates data and there were a notable number of closed-end funds and "banks" among the number of new lows.

I looked at all company profiles of the various symbols and what stood out at both the closed-end funds and banks was a "foreign" theme. Several of the "banks" also depicted that of regional weakness in the industrial belt as well as the weakest regional housing areas of Nevada and Florida.

TELEcom-like shares also littered the list of new lows. Here too, a "foreign" theme.

Here's a screen captures of notes I made today.

The above also reminds me that we got the weekly Mortgage Banker's Application Survey. Nothing that stood out again this week, other than a 1-year ARM fell to 7.07%, its lowest rate since the week ended 6.87%. I'm using the MBA's ARM observation ONLY as a weekly observation of where we might see "older" ARMs being reset if they haven't been refinanced.

The MBA said the average contract interest rate for a 30-year fixed fell to 6.47% from the prior week's 6.57%.

The MBA said that its purchases index slipped 0.4% to 314.00. I tabulated both a 4-week SMA (fell to 313.5 from prior week's 318.9) and a 12-week SMA (fell to 335.1 from prior week's 335.1).

The Dow Jones U.S. Home Construction Index (DJUSHB) finished the day up 4.99 point, or +1.82% at 278.47.

I think traders and investors may want to monitor the MBA's weekly application survey data rather close in coming weeks.

On Monday evening I ran across an Associated Press article titled "SoCal home sales climb in July, prices fall." The basics of the article was that home sales "surged" to a 16-month high in July as prices of single family and condos/town homes kept falling. According to MDA DataQuick, a total of 20,329 homes and condos (including new and existing models) were sold during July in the six county region surrounding San Diego, which was up 13.8% from July 2007 and up 16.7% from June. MDA's analysts thought it too early to call a bottom, but thought that buyers were starting to see "value" at lower borrowing costs.

MDA DataQuick said sales were helped as the median price in the region dropped to $348,000 last month, down 31.1% from the market peak of $505,000 in July 2007 and down 2.2% from $355,000 in June.

Foreclosures accounted for 43.6% of all resold properties in Southern California last month, up from 7.9% in July 2007 and a revised 41.8% in June.

Hey, if you're a parent and your 27-year old child moved back home with you about two years ago, having sold their home and made a killing, or simply won't leave the nest, you might want to start stacking some moving boxes by his/her bedroom door.

According to the article, Laura Flores, 27, became a first-time homeowner last month after paying $300,000 for a four-bedroom, foreclosed home in Ontario, east of Los Angeles. Mrs. Flores AND her husband had been living with her husband's parents.

The article didn't say just how long Laura and her husband had been "double dating" with the in-laws.

In Friday's Market Monitor at OptionInvestor.com, I noted that the iShares Russell 2000 (IWM) $73.00 +0.13% had traded their 12/31/07 close of $75.90. A "notable" feat for the second time this year.

On June 5th of this year, the IWM did the same, then the small caps went south to almost re-test their March lows.

I set up a TEST for divergence to the past (bullish), or similarity to the past (bearish) and so far, market participants have been bearish, pushing the small caps back lower.

The "next strongest" index that many will trade/invest in would be the QQQQ $47.09 +0.17%.

IWM and QQQQ Montage - Daily Intervals

The "technical similarities" I find between the IWM and the QQQQ come from the conventional retracement brackets we put in place dating back to late January.

What the two (2) charts above hint about MARKET PARTICIPANTS view of the GLOBAL economy, is that the U.S. may be the "safer" place to be, as other "foreign" markets/economies slow further.

I would think some of the QQQQ components have a LARGER footprint in foreign/overseas markets than most of the small caps.

Yesterday's and today's (Wednesday's) lows find support at their conventional 38.2%, but recent HISTORY (part of the test) would suggest a CLOSE below those respective levels $72.09 and $46.76 (maybe give them $0.10 room or so), are some technical PRICE signals that the STRONGER indices are weakening, and sellers (supply) is once again starting to overtake buyers (demand).

Major Global Indexes, Currencies, Oil, Gold, HUI, OIX and XLF

Remember! Oil as depicted by the USO is still up 24.05% YTD, yet the small caps have challenged their 12/31/07 close twice.

That's tough to get my mind around. I'd sure have to think that a rise in that input (oil) would have small caps feeling more of a hurt than two tests of their 12/31/07 close.

A "double date" of disastrous breakup hasn't come to fruition at this point.

I don't think "dollar strength" of late anything that U.S. equities would be concerned about. They sure didn't like the dollar weakness in Q1 and Q2.

Now the S&P 500, with most heavily weighted sectors being "energy" as partially reflected with CBOE Oil Index (OIX.X) and "financials" the XLF.

Now this has been one of those "double dates" that just hasn't been working out in anyone's favor of late.

The Dow Industrials (INDU) with CVX $86.46 +2.06% the #2 weighted component and XOM $78.81 +1.10% #3, have been clashing with AXP $37.43, JPM $37.00 +3.99%, BAC $29.29 +4.30%, AIG $20.80 +2.36% and C $17.49 (#15, #16, #22, #26 and #29) of late.

That's not to say that some of the weakness in overseas equity markets, which should be a reflection of those economies, isn't weighing on the INDU and SPX components, which provide a lot of products and services to overseas consumers.

SPY and DIA Montage - Daily Intervals

The "beating" that XOM and CVX have taken in recent weeks is perhaps easier to comprehend than what is going on in the broader S&P 500, and its something you really have to follow on a daily basis as even the HEAVY WEIGHTS of the SPX get shuffled each day and gains/losses in market cap weights between "oil" and "financial" stocks has been an eye opener.

The "bottom" line as I see it, based on several observations, including the SPY's "Max Pain" theory tabulation of $126.00 at Monday's open (it can change, or may have changed), is that a CLOSE below $126.00 is going to likely be a PIVOTAL level for traders, and there may be a long of fingers on "sell buttons" if the SPY closes below that level.

Stocks made a late session rally into today's close, so there's obviously some type of buying at, or just above the $126.00 level.

S&P 500 Index (SPX) - 10-point box

It was a difficult choice for this week's "Chart of the Week" but with "financials" and "energy" still in focus, and likely will be for quite some time, then the S&P 500 (SPX), or the SPY, is as good a chart as any.

If you simply don't like the heat, or the pressure that's building here, but do like movies that have a story line of double dating, then go watch the moving "When Harry Met Sally" as it has about as many twists and ups/and downs in its plot as the storyline that continue to play out here in the U.S. and global markets.

It's 09:00 PM EDT, and October Crude Oil (cl08v) ticks $116.03.

The Contrarian

The CBOE Equity Put/Call Ratio

I mentioned in last weeks commentary the CBOE Equity Put/Call ratios moving average chart below has been showing that there have been a few blip ups in the 10 day moving average. Last week we went to a Neutral Bias because the 10 day moving average approached 0.70. On Friday the 10 day moving average dipped to 0.692. As mentioned last week The signal will be moved to Negative if the 10 day moving average crosses above the 20 day moving average. As of Tuesdays close the 10 day moving average broke above the 20 day moving average. In addition the 20 day moving average began to advance upward on Mondays from Fridays low of 0.716. Basically the Put/Call ratio has signaled a Negative Bias as of Tuesdays close. I prefer to see the 10 day moving average dip to 0.65 and then bounce back up above the 20 day moving average prior to issuing a Negative (Bearish) bias signal. However, the 10 day moving average peaked higher than it normally does when signaling a bullish bias. Usually turns negative when the 10 day moving average dips to 0.65 or 65 puts to 100 calls traded. Bearish signals occur when a peak in call volume is achieved and confirmed by the 10 day moving average curling upward. SIGNAL: NEGATIVE BIAS

The CBOE Volatility Index ($VIX)

Volatility, as measured by the CBOE Volatility Index of the S&P500, remains relatively low even though the SPX has declined 32 points since Fridays close. The $VIX has moved up from 19.58 to close at 21.28 after peaking at 22.14 intraday today. The moving averages provide a filter for the $VIXs inherent volatile price action. At times when the 10 day moving average (DMA) curves or spikes upward the Positive signal is changed to a Neutral bias. Conversely, at times when the 10 DMA curls downward or ticks down near its upside range the Negative signal is changed to a Neutral bias. Crosses in the 20 day moving by the 10 day moving average filter out some of the noise and provide the signals confirmation.

The above chart of the CBOE $VIX is the daily candle stick price chart since May 20th. It shows the 10 and 20 day moving averages (grey and dark blue, respectively) as well as the 200 day Bollinger bands. Although not visible, the $VIX came down to the lower band on May 14th and hovered there until May 19th, which was the peak in the market and the beginning of the Go away in May trade! Also as notable, the capitulation on July 16th was achieved when the $VIX hit the upper Bollinger band. The funny thing about it is that nobody on CNBC was looking at the
real range because the experts were expecting the $VIX to hit 40. That peak in the 10 day moving average (DMA) from July 16th established the Positive bias that ended today. In last weeks commentary I wrote that a sharp move up in the 10 DMA toward the declining 20 DMA will make the signal Neutral. Because the 10 day moving average came down below the current range and curled upward to 20.71 from 20.69 the signal is changed to Neutral from Positive. As mentioned before The slightly flat movement of the 10 DMA appears to be just a pause and the 20 day moving average of the CBOE Volatility Index is confirming the current signal. However, the 20 day moving average closed up a little at 21.62 which can no longer provide confirmation of the downtrend and Positive bias. The markets began to decline on Monday and may continue to decline until VIX spikes up to the 20 DMA. A break and close above the 20 DMA would confirm the decline to me. So far the VIX ran up to the 20 day moving average on Tuesday but didnt close above it. The current range of the $VIXs 10 DMA has been extended to 17 as a low and 25 as the high. When the VIX is High its time to buy; when the VIX is low its time to go! The 10 day MA closed at 20.71 while the 20 day MA closed at 21.62. SIGNAL: NEUTRAL BIAS

The Investors Intelligence Polls

Last week there was a bit of a dip in the Investors Intelligence polls spread chart. This dip was caused by the Bullish percent of investment newsletter writers becoming less bullish. The Bullish Percent decreased to 31.8% from 34% while those newsletter writers that were Bearish increased to 45.5%. Last week we went into a Neutral posture after maintain a Positive bias since July 16th. I believe that move was timely and kept us in a safer overall position (see the summary).

Positive signals occur when the majority of those polled to become Bearish. The Bullish Percent increased to 40.7% from 31.8%. Those that are Bearish decreased to 38.4% from 45.5%. The Spread between the Bullish and Bearish percent increased back above the zero line to 2.3% from -13.7%. The Spread has been in negative territory since June 18th. Since the Spread didnt decline again the Signal didnt become Negative. We are back on a Positive bias this week. SIGNAL: POSITIVE BIAS

Summary: With all of the indicators on different signals the overall signal is remains on a neutral bias.

Robert J. Ogilvie

New Plays

Most Recent Plays

Click here to email James
New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
ACI None None

New Calls

Arch Coal - ACI - close: 52.37 chg: +2.17 stop: 48.99

Company Description:
St. Louis-based Arch Coal is one of the largest U.S. coal producers, with revenues of $2.4 billion in 2007. Through its national network of mines, Arch supplies cleaner-burning, low-sulfur coal to fuel roughly 6 percent of the nation's electricity. The company also ships coal to domestic and international steel manufacturers as well as international power producers. (source: company press release or website)

Why We Like It:
The coal stocks look like they are beginning to rebound after a very painful July-August correction. Several of them have broken through some short-term resistance levels and are building bullish reversal patterns on their weekly charts. ACI is one such coal stock. Wednesday's rally past $50.00 and its 200-dma is a bullish entry point to buy calls. We would also consider buying calls on another dip near $50.00. Our target is the $58.00-60.00 zone. The P&F chart is bullish with a $68 target.

Suggested Options:
We are suggesting the September or October calls. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY CALL SEP 50.00 ACI-IJ open interest=5449 current ask $5.00
BUY CALL SEP 55.00 ACI-IK open interest=3519 current ask $2.55

BUY CALL OCT 55.00 ACI-JK open interest=1450 current ask $4.20

Picked on August 20 at $ 52.37
Change since picked: + 0.00
Earnings Date 10/20/08 (unconfirmed)
Average Daily Volume = 6.4 million

New Puts

None today.

New Strangles

None today.

Play Updates

Updates On Latest Picks

Click here to email James

Call Updates

Adobe Systems - ADBE - close: 44.28 chg: +0.55 stop: 41.95

The positive earnings report from HPQ helped fuel a bounce in the tech sector. Shares of ADBE added more than 1% but failed to close over its 10-dma or the $45.00 level. Readers might want to buy a bounce from here but if you do consider a much tighter stop loss. Our target is the $47.50-50.00 zone. The Point & Figure chart is bullish with a $71 target.

Picked on August 05 at $ 43.34
Change since picked: + 0.94
Earnings Date 09/16/08 (unconfirmed)
Average Daily Volume = 6.5 million


Chesapeake Energy - CHK - cls: 48.62 chg: +1.70 stop: 44.65

Oil and energy stocks posted some strong gains on Wednesday. Part of the rally was fueled by a rise in crude oil and part was fueled by a bullish article in the Wall Street Journal suggesting the rally in energy stocks is ready to resume. Shares of CHK popped higher and broke through technical resistance at its 200-dma. One of our triggers to buy calls was at $48.05 so the play is now open. We have two targets. Our first target is $52.00. Our second target is $54.85. FYI: As expected CHK produced a brand new P&F chart buy signal that now points to a $62 target.

Picked on August 20 at $ 48.05 *triggered
Change since picked: + 0.57
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 20.2 million


Illumina - ILMN - cls: 94.02 chg: +1.45 stop: 88.45

ILMN continues to show some relative strength. The stock looks like it's coiling for a big breakout higher. If you think ILMN can reach our second target at $99.50 then this would still be an entry point to buy calls. We have two targets. Our first target is $95.25. Our second target is $99.50. FYI: ILMN has a 2-for-1 stock split scheduled for September 23rd. Traders might also want to note that ILMN's short interest is about 19% of the 50 million-share float. That's high enough to spark some short squeezes.

Picked on August 14 at $ 91.55
Change since picked: + 2.47
Earnings Date 07/27/08 (unconfirmed)
Average Daily Volume = 1.2 million


Itron Inc. - ITRI - close: 102.99 change: +1.13 stop: 98.45

ITRI bounced following yesterday's test of the $100 level. We remain bullish on the stock. More conservative traders might want to inch their stop loss closer to the $100 level. We've set two targets. Our first target is $105.75. Our second target is $109.90.

Picked on August 14 at $ 101.50
Change since picked: + 1.49
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 616 thousand


CBOE Volatility Index - VIX - close: 20.42 chg: -0.86 stop: n/a

Another bounce in the major indices deflated the recent rebound in the VIX. Wait for another rebound from the 20 region or a new rally past 22.50 before considering new bullish call positions. This is a speculative bet that the market will see another sharp sell-off strong enough to lift the VIX toward 30.00. Our target is 29.75 but readers might want to consider scaling out of positions in the 28-29 region.

Picked on August 03 at $ 22.57
Change since picked: - 2.15
Earnings Date 00/00/00
Average Daily Volume = x million

Put Updates

Bank of Amer. - BAC - cls: 29.29 change: +1.21 stop: 31.55

The financial sector and shares of BAC managed a bounce today in spite of 20+ percentage declines in FNM and FRE. The market continues to worry about a government bailout for the two GSEs that would wipeout current shareholders. Watch shares of BAC for a failed rally near $30.00 and its 10-dma as a new entry point to buy puts. We have two targets. Our first target was $28.00. Our second target is $25.50.

Picked on August 07 at $ 31.52 /1st target exceeded
Change since picked: - 2.23
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 90.4 million


Chipotle Mex.Grill - CMG - cls: 70.06 chg: -1.96 stop: 73.65*new*

CMG continues to under perform the market. The stock lost another 2.7% and briefly dipped under round-number support at the $70.00 level today. CMG did hit our trigger to buy puts at $69.90 so the play is open. We're going to adjust our stop loss to $73.65 so that CMG has a little bit more room to maneuver. Look for a failed rally under $73.00 or a new decline under $69.75 as an entry point to buy puts. We have two targets. Our first target is $65.50. Our second target is $61.00.

Picked on August 20 at $ 69.90 *triggered
Change since picked: + 0.16
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume = 888 thousand


Regonal Bank HOLDRs - RKH - cls: 99.53 chg: +2.91 stop: 105.75

Uh-oh! The RKH may have produced a short-term bullish reversal with today's bullish engulfing candlestick pattern. Wait and watch for a failed rally at $100.00 or near the 10-dma around $102.50 before considering new put positions. More conservative traders might want to consider a much tighter stop loss! We have two targets. Our first target is $91.00. Plan to exit all or most of your position there. We'll set an aggressive, secondary target at $86.00. FYI: The top three holdings in the RKH are JPM (19%), WFC (13.6%) and WB (10%).

Picked on August 18 at $ 99.80
Change since picked: - 0.27
Earnings Date 00/00/00
Average Daily Volume = 3.1 million


Uniao de Bancos Brasil - UBB - cls: 119.96 chg: +3.12 stop: 117.75

Brazilian bank UBB delivered a nice bounce today but failed to close over potential resistance at its 10-dma and the $120 level. Volume was very low on today's rebound. We're currently waiting for a bearish breakdown under support near $112.50. However, if UBB provides a clear failed rally pattern in the $124-130 zone we might jump on it as an alternative entry point. Officially our current trigger is at $112.50. If triggered our target is the $102.50-100.00 zone.

Picked on August xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 1.5 million

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)


Lehman Brothers - LEH - close: 13.73 chg: +0.66 stop: n/a

LEH managed a 5% bounce on Wednesday after plunging the last couple of sessions. The overall trend remains very bearish so this is probably nothing more than a sharp oversold bounce. We are not suggesting new strangle positions at this time. We have a few weeks left before September options expire and need to see LEH significantly above $24.00 or under $10.00. The options we suggested were the September $24.00 calls (LYH-IR) and the September $10.00 puts (LYH-UB). Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.

Picked on July 27 at $ 17.05
Change since picked: - 3.32
Earnings Date 09/18/08 (unconfirmed)
Average Daily Volume = 63 million

Dropped Calls


Dropped Puts


Dropped Strangles


Today's Newsletter Notes: Market Wrap by Jeff Bailey, The Contrarian by Robert Ogilvie and all other plays and content by the Option Investor staff.


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